Visibility on economic growth in India in FY14 is fading as neither monetary nor fiscal policy is in a position to support growth. With a new RBI governor in place, monetary policy seems also certain to be used to defend the currency (alongside a swap line from the Bank of Japan). That necessarily implies tight monetary policy (and high short-term interest rates) for the foreseeable future.

With regards to fiscal policy, given that the central government has already spent 63% of its full-year fiscal deficit by the end of July and given that slippage on the receipts side is likely to amount to a minimum of R400 bn (factoring in R100 bn of slippage each on disinvestment, spectrum auctions and tax revenue), the government will have to pare expenditure in the rest of the financial year; remember the finance minister has been very clear that he will deliver on his fiscal deficit target of 4.8%. This implies that between now and the end of the year, Government spending will grow at only 14% (as opposed to our previous estimate of 18%).

Over and above these adverse pressures from monetary and fiscal policy, we also have the small matter of the evaporation of growth in Q2. Whilst our discussions with management teams suggest that Q2 will be the most painful quarter we have seen in this downturn, in terms of economic growth, it is hard to get a fix on whether it will be a 3% or 4% GDP growth quarter. The precise number matters because it sets the tone for the rest of the year—with Q1 growth being 4.4%, if Q2 is 3% then H1 will see growth of less than 4%. In such circumstances, even if H2 growth recovers to 5% (say, due to higher power generation, a monsoon-fuelled pick-up in agriculture and a pick-up in exports), full- year growth could fall shy of our current estimate of 4.7%.

That being said, whilst growth falling shy of 4.7%, and going as low as 3.5%, is a distinct possibility, we find some pessimists’ estimates of 2% growth in FY14 (either on a full-year basis, or more realistically, by Q4 FY14) overly pessimistic. Here’s why.

o Agriculture (15% of the economy) should grow at well over 3% thanks to a bountiful monsoon (our FY14 estimate is 3.9%, the Q1FY14 figure was 2.7% and the five-year average is 2.9%), and o Services (60% of